A host of angels flock to a syndicate site for venture capital

SAN FRANCISCO (Reuters) - Over lunch on Monday at a sushi restaurant in downtown Boulder, Colorado, venture capitalists at early stage investment fund Foundry Group decided to act on an initiative that aims to admit more than the usual foundations and university endowments to the VC clubhouse.

Last week, a change in federal regulations allowed AngelList, a site that has connected startups with potential investors since 2010, to let its companies and their backers publicly solicit funding.

AngelList took the wraps off a program that Foundry and many others have embraced: syndicates that comprise large groups of individual investors.

In just a few days the site has already become the talk of the VC community. Among its Angel investors are Yahoo Chief Executive Marissa Mayer and LinkedIn co-founder Reid Hoffman.

Some say syndicates bring the potential to transform venture capital by raising the profile of individuals at the expense of established venture firms.

"Invest in syndicates led by proven angels," AngelList wrote on its home page, over photos of well-known Silicon Valley entrepreneurs and investors.

The syndicates allow one angel - typically an affluent person who provides capital for a startup - to lead a group of accredited investors to back companies that list themselves on the site as looking for cash. Accredited investors are those with net worth, not including their homes, of $1 million or more. No money changes hands until a startup is selected for funding.

While AngelList already allowed syndicates, they did not draw much attention until the site could trumpet them starting September 23. A mini gold rush followed, as investors scrambled to start their own and get them featured on the site.

Today, almost 300 syndicates are on AngelList. Digg co-founder Kevin Rose has already raised commitments of $1.4 million for his, with social-network Path founder Dave Morin second at $963,000.

To some extent the site is merely formalizing what many angel investors already do - find a company they like, invest, and persuade their friends to invest too. The difference is that with AngelList, the lead investor can take a portion of any profits the other investors make on the deal, typically 10 percent to 20 percent. AngelList takes 5 percent of the profits.

The commotion has caught the eyes of mainstream venture capitalists. Some are wondering if angel investors can take on the roles that should match the outsized cash they are bringing to startups, roles traditionally filled by the professionals.

"They will have to step up before anyone else does," wrote Fred Wilson, an early backer of Twitter and a partner at Union Square Ventures, in a blog post on Sunday. "They will have to negotiate price and terms. They will have to sit on boards. They will have to help get the next round done. Essentially they will have to work."

Over time, he says, the talented angel syndicators will emerge.

"Some will turn out to be great at this," he wrote. "Many won't."

Others say they are excited about the developments, which could bring more clout to angels. Mark Suster, a partner at Upfront Ventures, wrote that syndicates would help venture by streamlining and having one angel take the lead on a deal, instead of having dozens on equal footing.

"It will complement our industry," he wrote in a blog post published Sunday. "New competitive dynamics are good."

Some, such as Foundry Group, are embracing it whole-heartedly.

Foundry aspires to make 50 investments through its $2.5 million syndicate in companies on AngelList by the end of 2014, according to a blog post by partner Brad Feld. It will invest $50,000 in each startup, and will supplement that with funds from what it hopes will be a $500,000 syndicate. The funds Foundry invests will come directly out of its Foundry Group fund, Feld said.

"We recognize the landscape for early-stage investing is constantly evolving," he wrote. "The best way to really understand it is to participate."

One journalist took that adage to heart. On Tuesday, Valleywag's Sam Biddle went onto the AngelList site and signed up as an accredited investor despite, as he wrote in his blog post, not meeting the criteria.

"All I did was sign into AngelList with my Twitter account and make up a fake startup name to show that I have some previous experience in this hot field," he wrote Tuesday in a blog post titled, "It was scary easy for me to fake being a venture capitalist."

He signed up to join Morin's syndicate and created one of his own, attracting several backers. But AngelList caught up to him and took his syndicate down hours after he created it.

"No money changed hands, no harm was done," said Naval Ravikant, founder of AngelList, in an email. "If anyone had actually tried to send him money or if he had tried to collect any, then he would have gone through much more thorough vetting processes."